Review of monetary sector in Azerbaijan (January-June 2011)

In June 2011, the growth of the currency reserves of the Central Bank of Azerbaijan was 0.7 percent, and in January-June, it already reached 8.4 percent as compared to the beginning of the year. In 2009, the bank lost 15.7 percent of its foreign currency reserves, or $961.4 million, and in 2010 their growth was $1.245.9 billion or 24.1 percent, that is, the bank managed to compensate for the losses in 2009 and achieved net growth at $284.5 million for 2 years.

The CBA stated that as of July 1, 2011, the amount of currency reserves totaled $6.947.5 billion (the new absolute maximum) as compared to $6.898.8 billion as of June 1, $6.407.6 billion as of Jan. 1, 2011 and $5.175.6 million as of Jan. 1, 2010.

The CBA expects its foreign exchange reserves to reach $8 billion by the end of the year, and their current level is already 86.8 percent of its forecast.

Currency market and manat rate

The Central Bank of Azerbaijan (CBA) plans a transition to a more flexible monetary management system in the next 10 years

Many central banks transition to a flexible currency rate in order to establish a more flexible monetary management system, though the transition process may take at least 10-15 years. This is common in world countries, particularly those which possess tremendous export and currency revenues. Flexible monetary management ensures absorbing foreign shocks, i.e. a flexible exchange rate prevents the overheating of the economy when it is faced with a great volume of export and inflow of investments in the country.

However, the transition to a flexible exchange rate is possible in the long-term prospective," Abdullayev stressed. The key objective today is technical and macroeconomic estimation of long-term prospects and conditions it which transition is possible, as there is a system of structural, institutional, and macroeconomic factors. Generally, a possible transition is estimated to take place within 10-15 years.

One of the terms of transition is creating a very strong capital market and proving strong integration of the country into international financial markets. A flexible currency rate is applied when the country receives tremendous financial flows," Abdullayev noted. "Our key objective is to be prepared technically and intellectually and to have a concept, because the process of transition in itself is very difficult in terms of both macroeconomics and structure.

The Central Bank of Azerbaijan appealed to the International Monetary Fund (IMF) for technical assistance to improve the structure of the monetary system and rate policy in Azerbaijan. Technical assistance will be rendered for transition to a more flexible mode of the national currency exchange.

The draft long term strategy of economic development of Azerbaijan for 2011-2025, developed by the Ministry of Economic Development, includes plans on transition to a free floating rate of national currency within a flexible rate policy. In this case, the average annual change of the nominal manat rate is predicted at 1 percent.

The national currency rose by 1.8 percent as of 2009, 0.6 percent in 2010, and by 1.2 percent since the beginning of 2011.

In the first half year, the Central Bank of Azerbaijan (CBA) conducted the sterilization of currency in amount of $324 million and the monetary market operated in regime of self-regulation.

Since the beginning of the year, the CBA conducted its exchange rate policy in conditions of expanding channels of supply in the monetary market and new operational mechanism.

In the first half year, the manat rose by 1.4 percent in relevant to the U.S. dollar. The stability of the national currency during this period had a positive impact on the stability of macroeconomic and financial sectors.

In the first half year, the nominal effective exchange rate (NEER) of manat has strengthened in relevant to the currencies of some countries - trade partners of Azerbaijan, and lowered in relevant to the currencies of other countries. The dynamics of the nominal effective exchange rate of manat has an impact on the change in the real effective exchange rate (REER).

During the reporting period, manat dropped as nominally and really in relevant to the currencies of some countries (Eurozone, UK, Russia, Georgia, Japan, Israel, China, South Korea). Manat strengthened as nominally and really in relevant to the currencies of the United States, Turkey and Belarus.

In the first half year, the NEER on non-oil sector in the total turnover decreased by 1.7 percent. Inflation in the partner countries had a 1.6 percent downward effect on the REER. REER on non-oil sector dropped by 0.8 percent. In relation to the neighboring countries, which import more than 80 percent of non-oil exports, the REER dropped by 3.1 percent.

As a result of trades in currency section on tool USD/AZN_TOD, Baku Interbank Currency Exchange (Baki Banklararasi Valyuta Birjasi - BBVB) defined five banks - leading operators of exchange market of hard currency in July 2011. Azerbaijan Industry Bank (ASB Bank) has headed five bank-leaders of exchange currency market in accordance with shares of transactions concluded by it.

International Bank of Azerbaijan, Xalq Bank, Unibank and AGBank also included in the number of the leading dealers of organized currency market. In accordance with it below is the list of banks - the leading operators of exchange market of hard currency in July 2011*.

*In the data are not considered transactions of the Central Bank of Azerbaijan.

In total 15 banks have taken part in the trades of currency section of the BBVB in June 2011. In accounting month in "Bourse E-System of Trades" (BEST) 40 trading sessions are conducted and 41 transactions are registered. The total volume of trades of currency section in accounting month on USD/AZN has made 71.553 million manat or 90.883 millions in dollar equivalent.

In comparison with indicators of May in accounting month the total volume of trades in currency section has increased on 29.361 million manat or 70%. The average daily turnover in "Bourse E-System of Trades" on USD/AZN reached approximately $ 4,544 millions, then that the average volume of each transaction has made $ 2.215 millions.

As a whole, on results of January-June of this year, the volume of E-Trades with foreign currencies at BBVB has made 511.225 mln manat.

It is necessary to note, that exchange rate of national currency on tool USD/AZN_TOD in accounting month has increased on 0.4% from 0.7891 to 0.7863 for 1 USD. Thus the US dollar average rate in consideration to manat has made in June 0,7873 manat for 1 USD, against 0.7900 AZN following the May results of current year.

Loan market

Azerbaijani banks decreased lending to the Azerbaijani economy by 2.6 percent in in the first half year of 2011, but increased 7.9 percent as compared to the same period of 2010. As of early July, the banks provided loans totaling 8.736.8 billion manat.

In the first six months, the loan portfolio quality remained at an acceptable level, the share of overdue loans accounted for 6.3 percent of the portfolio, non-standard - 8.5 percent, including non-working - five percent.

As of July 1, the reserves established for credits amounted to 8.6 percent of the portfolio, increasing by 0.7 percent since the beginning of the year.

The share of loans in national currency as of July 1 was 62 percent. The share of long-term loans since the beginning of the year fell by 5.1 percent to 67.9 percent or 5.9 billion manat. Short-term loans in the first half year increased by 15.6 percent, amounting to 2.8 billion manat. The share of long-term loans since the beginning of the year fell by 5.1 percent to 67.9 percent or 5.9 billion manat.

According to the CBA, in the first half year, significant changes were not recorded in the interest rates on loans and deposits in national and foreign currencies Azerbaijani banks in the Azerbaijani banks.

In the first half year, the average interest rate on deposits was 11 percent, on loans - 16-17 percent.

During the reporting period, there was a reduction in the real interest rates. In June 2011, the year real interest rate on deposits declined from 6.2 percent to 1.9 percent as compared to the same period of the last year. Real lending rate declined from 11.5 percent to 7.6 percent over the year.

Banking sector

The total deposit base of banks increased by 8.8 percent, reaching 5.93 billion manat compared to early 2011. The share of deposits in total liabilities was 54.5 percent compared to 46.5 percent in July 2010.

The deposits of legal entities increased by 2.5 percent and hit 2.48 billion manat. The deposits of legal entities increased by 15.4 percent and hit 41.8 percent of bank deposits per year.

As of July 1, the share of deposits in bank liabilities was 31.7 percent compared to 25.3 percent as of early 2010. The average monthly growth of the population's deposits amounted to 2.2 percent. But significant growth was observed in the second half. The volume of deposits increased by 13.9 percent in the first half, by 34.7 percent per year and hit 3.45 billion manat.

The deposits in current accounts increased by 5.3 percent for six months, urgent deposits - by 11.5 percent. The share of urgent deposits in the total portfolio was 58 percent.

The volume of deposits in national currency for the first half increased by 18.7 percent and its share in total amounted to 48.5 percent (compared to 43.4 per cent on July 1, 2010).

The share of funds drawn from CBA in total liabilities declined from 13.9 to 6.4 percent compared to early 2011.

In June 2011, the capitalization of the banking sector of Azerbaijan rose by 0.9 percent, but compared to the end of 2010 - 4.6 percent, amounting to 2.269.2 billion manat as of July 1.

According to data provided by the CBA, the number of banks with capital exceeding 10 million manat was one less as compared to the end of 2010, totaling 41 banks in June. The share of this category of banks in the total capital of all banks in the country in June amounted to 98.9 percent as in May and the beginning of the year.
The capital of two banks (with specific weight of 0.9 percent) formed within five to 10 million manat, one bank (0.2 percent) - 3.5 million to five million manat.

As of July 1, the total capital of Azerbaijani banks amounted to 1.897.14 billion manat. According to the CBA, 45.66 percent (866.33 million manat) of the total aggregate capital of the banking system accounted for the top five banks in the country. The banks ranking 6-15th form 25.3 percent of total capital or 479.98 million manat, and the banks ranking the 16th to 30th form 337.32 million manat (17.78 percent).

The 16 banks ranking 31st to 44th form 11.25 percent of total capital (213.51 million manat).

As of July 1, the total assets of Azerbaijani banks amounted to 13.141 billion manat, or 1.1 percent less than a year earlier.

As of June 30, 91 percent (8.41 billion manat) of their total amount accounted for standard assets compared to 93.7 percent (11.15 billion manat) as of early year. The share of non-standard assets decreased by 9 percent (778.61 million manat), compared to 6.3 percent (749.73 million manat) as of early 2011, insufficient assets hit 3.6 percent (310.43 million manat) compared to 2.5 percent (302.12 million manat), respectively.

Some 2.8 percent (245.75 million manat) accounted for risky assets compared to 2 percent (239.38 million manat) as of Jan. 1, 2011, and 2.6 percent (222.44 million manat) - bad assets compared to 1.7 percent (208.16 million manat).

According to the CBA, the top five banks in the country have total assets at 7627.16 million manat, or 58.04 percent of total banking assets. Some 3.038.36 billion manat assets or 23.12 percent of the total volume on the sector accounts for the banks ranking 6th-15th, and the banks from 16th to 30th - 1.887.7 billion manat (14.36 percent).

Sixteen banks ranking 31st to 46th, account for 4.47 percent of the total volume (587.87 million manat).

Some 44 banks operate in Azerbaijan.

Stock market

The total turnover of transactions on all instruments at Baku Stock Exchange (BSE) for the first half year of 2011 totaled 3.725 billion manat, increasing by 4.42 times compared to the same period of last year, a statement said.

The corporate securities market increased by 1.73 times compared to the same period of last year. This is stipulated by the increased volume of transactions in corporate bonds by 2.23 times.

The state securities market increased by 5.14 times up to 3. 418 billion manat. This happened as a result of the sharp increase of operations by 4.39 times. The number of deals increased by 1.5 times.

Comparative table on the results of trades of Corporate Securities at BSE (January- June 2011)

Comparative table on the results of trades of Government Securities at BSE (January- June 2011)

Abbreviations

GB - government bonds

GS - government securities

CB- corporate bonds

CS- corporate securities